At my firm CoRise , we have been focusing on disruption and the digital media landscape, which we have broken out into 4 spheres of influence: Social, Informational, Entertainment, and Transactional. The Transactional sphere is defined by technologies that bring the consumer and merchant closer together – this includes daily deals, ecommerce, and payments among other subsegments. To us, Payments appears to be a tremendous area ripe for disruption – new technologies are changing the relationship between consumers and merchants. The opportunity is extremely large , as this is a huge market with >$41 trillion in electronic payment volume and ~$300b in revenue in the US payment industry alone. Realizing the massive opportunity, we partnered with a payments expert, David True of BroadlyCurious. As we dug deeper into the sector, the innovation and experience changing technologies were quite astounding. As I blogged about a few weeks ago, being able to walk into a unfamiliar café, order a latte, and merely say “put it on Bob” without having to pay with cash, or wave a phone, or swipe a credit card was truly an inspiring and mind opening as to what payments will be like in very short order (FYI – I used Square’s CardCase).
Several things are driving this disruption, including: the growth of mobile (smartphones), the introduction of tablets (utilized as “cash registers”), the ubiquitous nature of wireless broadband or wifi, changing regulation, and a difficult economy. Merchants are looking for new ways to: get new customers, improve inventory management, increase customer loyalty and reduce payment costs. Consumers are looking for easier ways to pay to: avoid lines, get more personalized rewards, and have a transformed experience (ie emailed receipts). There are many technologies and companies looking to shape the future, and for them to succeed they’ll need to provide a differentiating enough experience for consumers to get them to switch from cash or swiping a credit card. A big part of this will be having a critical mass of merchants to entice them. So the new technologies mush also be attractive to merchants, helping them address their concerns above. There will likely be a few winners, but not all will win as the merchants & consumers will only want to manage a few alternatives most likely.
The industry is already shifting, as credit card transaction growth has flattened, while ACH is growing. The Issuers (banks) and Networks (ie Visa / Mastercard) are adjusting to new regulations (ie Durbin, Reg E, and the Card Act), which pressure revenues. They must therefore be adept at navigating the new world in order to capitalize and grow faster.
Who will win? It’s too early to predict what technology (NFC, Hi Frequency Radio, 2-D barcode, Proximity, Image Scan, or etc) will win. However, a couple things are clear: 1) the consumers will have value accrete to them, as the industry provides easier ways to pay, better rewards, and cheaper payment sources; 2) the merchants will have value accrete to them as well as they will have cheaper payment methods, more information about their customers, and better consumer loyalty capabilities. Lastly, the issuers and networks, could be perceived as the groups positioned to lose value. However, we think that the proliferation of electronic payments will bolster them as well – currently, ~70% of transactions are non-electronic (ie cash, or checks). There is a tremendous market share to be gained that should be able to support the multiple parties. Slide 37 in our deck is meant to show this. The slides can be found on our research tab, here.
Lastly, one of the most exciting outputs of the innovation in this space, will be the creation and leverage of Big Data on top of Payments. The ability to leverage one’s social graph, with information (geo, intent, and more), and with Entertainment (check in games), will open possibilities for all parties that weren’t conceivable before.
Our slides are meant to walk readers through what seem like very confusing forces in Payments, but in reality are very simple: technologies and services that serve the customer well should be poised to succeed. On the flip side, for companies that don’t adapt to the new world, they will likely be challenged.